BackUltra short-term to stay attractive
Ultra short-term to stay attractive
PremiumLakshmi Iyer, Head (fixed income & products), Kotak Mahindra Asset Management Co. Ltd
Thanks to rules, debt funds maturity buckets are shifting. Liquid funds are more liquid. Ultra short-term (ST) fund is the new liquid fund; short-term bond fund is the new ultra ST fund.
If the Budget abolishes dividend distribution tax (DDT) on ultra ST funds, will they become unattractive compared with bank fixed deposits (FD) for a period of three to six months?
I don’t think so. The advantage of an ultra ST fund would reduce, but not get eliminated totally. Even if DDT is abolished, we don’t expect all the money to shift from liquid funds to bank FDs. If that happens, bank FD rates would drop with the sudden rush of money. So, barring certain patches where we have pressure from the banking industry for deposit growth, etc, ultra ST funds would continue to outperform bank FDs. Ultra ST funds offer liquidity, so they will continue to be attractive.
Your ST bond fund has a maturity of 13-14 months against 18-25 months that many ST funds have. Is that a disadvantage?
Also, after the credit policy in July 2009, interest rates became volatile. ST bond funds were as volatile as long-term bond funds. That’s when we started reducing our duration. Largely accrual income and a little bit of capital appreciation is what you will get in our ST bond fund. Investors who want to get the benefit out of interest rate fluctuations may come to our long-term bond and gilt funds.
What do you look at when investing in debt instruments?
An instrument’s creditworthiness and its duration is important. Liquidity is also important. We also decide whether we want to go for public or private sector companies and banks.
Ultimately, we look at the company’s financials and solvency. If we don’t feel confident about the firm’s creditworthiness, we avoid investing there. We prefer to invest predominantly in higher rated instruments. The idea is to buy assets in line with the duration recommended for our funds.
Lakshmi Iyer is head (fixed income & products), Kotak Mahindra Asset Management Co. Ltd
—Kayezad E. Adajania
kayezad.a@livemint.com
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